Shares wobble on profit jitters

Dell warning hobbles techs

By

JulieRannazzisi

NEW YORK (CBS.MW) - The major averages couldn't shake off their blues Thursday as Dell Computer's profit warning weighed on sentiment throughout the trading day.

The litany of high-profile tech warnings over the past couple of weeks - with Dell Computer, Apple and Intel all announcing shortfalls -- has hammered the big names that investors looked to for leadership.

With third-quarter earnings just around the quarter, observers say the companies that haven't warned need to sharply exceed expectations and provide a rosy outlook for the coming quarters to regain at least some of investors' confidence.

"This is a market attempting to heal the excesses of the first quarter. There has been a re-evaluation of technology stocks and we've flip-flopped to other sectors of the market," noted Scott Bleier, chief investment strategist at Prime Charter. It's a market that's adjusting to softer growth brought on by the Fed's rate hikes and higher energy prices.

Not surprisingly, chip and hardware stocks saw the headiest losses within the technology arena. In the broader market, retail, utility, paper and oil shares weakened. The latter extended losses as November crude dropped 90 cents to $30.53 after falling as much as $1.26 to seven-week lows in intra-day dealings. See full story. A bright spot for the market were drug, airline, consumer product and financial issues.

The Dow's laggards included Hewlett-Packard, International Paper, General Motors, AT&T, Home Depot and Honeywell. The most solid gains were seen in shares of Coca-Cola, Johnson & Johnson, Procter & Gamble, SBC Communications and Citigroup.

In earnings news, Dow-component Alcoa
AA, +1.19%
posted third-quarter earnings of 42 cents a share, matching the lowered First Call estimate. Alcoa warned of softer earnings on Sept. 18 -- when First Call estimates stood at 49 cents a share - due to higher energy costs and slowing in the transportation, building, construction and distribution markets. The stock eased 19 cents to $27.06 but has been on quite a run in recent sessions, surging 10 percent on Tuesday. See full story.

The Nasdaq Composite
$COMPQ
slipped 51 points, or 1.5 percent, to 3,472.10 while the Nasdaq 100 Index
$NDX
lost 29.04 points, or 0.9 percent, to 3,424.32.

"The market is still in an overall correction, with the formerly hot tech stocks falling like dominoes on a daily basis. The correction will likely continue until the Nasdaq also has a wash out day," said Robert Dickey, chief technical strategist at Dain Rauscher Wessles.

"The odds of the current correction developing into a longer-lasting bear market are lower, as the economy does not appear to be headed into a recession -- which is often associated with longer-term market problems," Dickey continued.

"There's lots of churning," said John Zaro, managing member at Bourgeon Capital Management, referring to the sector rotation out of growth and into value stocks that has been taking place in recent months.

He believes the market won't be able to produce a sustainable advance until a clear bottom is in place. The Nasdaq, he said, may still need to test its April bottom.

"You need a more broad-based washout, where the Broadcoms, Sun Micros and EMCs [out there] get hit," Zaro continued. These stocks, in fact, haven't really come off their perch and carry even loftier valuations compared to the rest of the market, he concluded.

Volume came in at 1.18 billion on the NYSE and at 1.86 billion on the Nasdaq Stock Market. Market breadth was negative, with losers outpacing winners by 16 to 12 on the NYSE and by 23 to 16 on the Nasdaq.

Sector movers

Keeping the computer hardware sector in a rut were shares of Dell Computer
DELL
which fell $3, or about 10.6 percent, to $25.19. After the close, Dell warned that third-quarter revenue would fall 3 percent below expectations due to soggy European demand and weaker-than-expected global sales to small-business customers. The news came a week after Apple Computer
AAPL, -0.11%
warned of softer sales. The stock lost $1.56 to $22.06 and the Goldman Sachs Hardware Index
$GHA
slid 4.0 percent. Also hemorrhaging were shares of Hewlett-Packard
HWP
down 7.7 percent to $88.25, and Compaq Computer
CPQ
off 12.6 percent to $25.20.

While Dell said it's still on track to meet third-quarter estimates, it believes fourth-quarter estimates could come in one to two cents below target. First Call expects a profit of 25 cents a share for the third quarter and 28 cents in the fourth quarter. See full story. The stock saw its rating lowered by SG Cowen to a "buy" from a "strong buy."

In the chip arena, Micron Technology lost $5.94, or 12.6 percent, to $41 after running up substantially on Wednesday. After the close Wednesday, the company
MU, +2.53%
posted a fourth-quarter profit from operations of $1.16 a share, handily surpassing the First Call estimate of 96 cents a share. Read the full story. Intel
INTC, -0.83%
gave up the feeble gains posted at the open, ending down $1 to $41. The Philly Semiconductor Index
SOX, +0.35%
fell 3.6 percent.

Merrill Lynch believes it'll be a sloppy earnings season for chip stocks due to problems in the PC and wireless markets, which will effectively cap the upside and provided a cautious outlook for the fourth quarter. But Merrill said in a note to clients that it expects to see few outright misses and predicts revenue growth of 32 percent for the 25 companies it tracks in the group.

"All of our work indicates that the semiconductor business' current difficulties are not the result of over investment, but rather disappointing demand," Merrill continued.

Internet stocks were held down by steep losses in shares of Priceline.com
PCLN
after the online retailer said two of its licensees -- WebHouse Club, a seller of groceries, and used merchandise seller Perfect Yardsale -- would close in the coming months. The news came about a week after Priceline warned that third-quarter revenue would come in below expectations. See full story. The stock fell 38 percent, or $3.56 to $5.81.

The B2B sector was also badly bruised, led by Internet Capital Group
ICGE
which saw 21 percent of its value evaporate. Merrill's B2B Holdrs
BHH
slid 10.4 percent.

Shares of consumer product stocks flexed their muscles following a slew of upgrades from Merrill Lynch. The brokerage upped its view on Colgate-Palmolive
CL, -0.37%
Procter & Gamble
PG, -0.55%
Gillette
G, -0.23%
and Clorox
CLX, +0.21%
among others, to a "near-term accumulate" from a "near-term neutral." Merrill said the battered group is better positioned to benefit from company-specific initiatives. Clorox was the biggest gainer with a 7-percent advance to $42.19. See Rating Revisions. The Morgan Stanley Consumer Index
$CMR
advanced 1.4 percent.

Retail stocks lost ground as a warning from J.C. Penney discouraged some investors. The S&P Retail Index
RLX, +0.00%
lost 1.2 after rising 2.1 percent on Wednesday. See related story.

J.C. Penney
JCP, -0.43%
said Thursday that it won't meet the Wall Street consensus estimate for third-quarter earnings due to the challenging retail environment and continuing disappointing results in its Eckerd drugstore operations. J.C. Penney now expects to report earnings-per-share ranging from a small profit to a loss for the third quarter versus the First Call estimate of 10 cents a share. The stock fell 11 percent to $10.06.

Some retail stocks put on impressive performances, however. Shares of Gap
GPS, +3.03%
for example, climbed 6.6 percent to $21.19 even after reporting that September sales fell by a larger-than-expected 8 percent while Talbots
TLB
swelled 10.7 percent to $73 after increasing its third-quarter earnings-per-share outlook to $1.00 to $1.02 versus the First Call estimate of 85 cents a share.

In the biotech sector, which ended on a mixed note after a generally positive session, Affymetrix
AFFX
was the standout, rallying 16.1 percent to $61.25. The stock got two upgrades Thursday: one from Chase H&Q to a "buy" from "market perform" and another from Dain Rauscher Wessels to a "strong buy" from a "buy."

On the economic front, weekly initial claims rose 10,000 to 299,00 in the latest week.

Friday will see the release of the granddaddy of all economic numbers: the September employment report. Non-farm payrolls are expected to show an increase of 235,000, according to a survey of economists conducted by CBS MarketWatch.com. The jobless rate is expected to have remained steady at 4.1 percent while average hourly earnings are seen rising by 0.3 percent. View Economic Preview, economic calendar and forecasts and historical economic data.

In the currency arena, dollar/yen slipped 0.2 percent at 109.09 yen while euro/dollar shed 0.7 percent to 0.8684. The euro briefly gained some ground following the European Central Bank's decision to raise short-term rates by 25 basis points at its policy-setting meeting Thursday -- but saw those gains vanish very quickly. Read the full story. The ECB, Federal Reserve and Bank of Japan intervened jointly two weeks ago to support the fledgling currency, effectively creating some stability in foreign exchange markets with traders generally fearful to take on short euro positions for fear of further intervention.

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